Burgelman’s Trap: Identifying Flywheel Businesses for Sustainable Growth

During their latest episode of the VALUE: After Hours Podcast, Taylor, Carlisle, and Carroll discussed Burgelman’s Trap: Identifying Flywheel Businesses for Sustainable Growth. Here’s an excerpt from the episode:

Tobias: Jim, we usually do veggies, which is, Jake’s. Jake’s got some learnings for us brought to us from the Sacramento International Airport today. So, there’ll be a little bit of background noise, but then when we come back, we’ll get some predictions from you since COVID was predictable, let’s predict the next thing.

[laughter]

Jake: So, this week’s veggies are about this book by– It’s a short little missive from Jim Collins called Turning the Flywheel. And they’re in it. He has this thing called Burgelman’s trap, which we’ll get into, but just talking about flywheels more generally. They’re these mechanical devices which store energy in the form of rotational momentum, and it works because of a principle called the conservation of angular momentum, tickets for physics classes. But basically, torque can be applied to a flywheel to cause it to spin, and it increases its momentum, and this stored momentum could be used to apply torque to any rotating object, so most usually like in machinery or motor vehicles. And a flywheel inherently smooths out these small deviations in the power output of a system, so the stored energy inside of it can donate if there’s a drop in the power input, and conversely, it can absorb excess power that’s being generated in the form of rotational energy.

So interesting that one’s made out of steel are generally limited to a max rate of a few thousand RPMs. But they have these high energy density flywheels that are made of carbon fiber composites and actually use like magnetic bearings, less friction. And it allows them to revolve at speeds up to 60,000 RPMs, which is kind of cool.

I mean, flywheels have been around forever in the form of like spindles and potter’s wheels. 3500 years ago. Or sorry, 3500 BC, they had rudimentary potter’s wheels. So, this idea of like moment of inertia is another physics term, and it plays the same role as kind of in rotational kinetics as mass plays in a linear world. So, they both characterize a resistance to change. It’s resisting you doing something to it. Sometimes you want a high moment of inertia. So, like for instance, a tightrope walker, they use this long rod as a balance and it’s because it has a very high moment of inertia. It takes a lot of energy to make it move rotationally. And so, then it provides– It resists rotation, which gives the walker balance and that’s why they’re able to kind of keep their balance better as they’re walking across the tightrope. Sometimes you want a low moment of inertia. And to improve maneuverability, combat aircraft are designed to minimize their moment of inertia. This is what a lot of the work of like John Boyd was centered on.

And I know, Tony, you sent me some stuff on that, which is really interesting. So back to this book about flywheels in the business context. And Collins is saying that basically every good business has some flywheel to it that gathers momentum as the business gets spun up and what he calls like strategic compounding.

And so, of course, Amazon is kind of like– Everyone has heard, this one is probably the most widely discussed, but here’s a rough sketch of Amazon’s flywheel. You start with lower prices on more offerings, which then increases customer visits, which then attracts more third-party sellers, which then expands the store’s offerings, which then grows revenue per fixed cost, which then allows them to lower prices, and then we start the whole flywheel over again. So, you’re feeding energy into each one of these things, each component, and it’s getting the spinning faster and faster. One way of thinking– Like you should be able to say at the end of each little consequence, you almost can’t help but.

So, for instance like Vanguard has a flywheel that they’ve been turning now for almost two years. They offer low-cost mutual funds, which you almost can’t help but deliver good long-term returns, which you almost can’t help but build customer loyalty, which you almost can’t help but grow AUM, which you almost can’t help but create economies of scale, which you almost can’t help but lower costs, right? So, we’re back up to the top of the flywheel again, so this thing is just spinning.

And so, companies that have survived for a long time often have to discover new flywheels to build, along with the ones that they have going. Of course, everyone knows Amazon and having both AWS and retail operations, but there’s lots of other examples like 3M, they added adhesives like Scotch tape to their abrasives like Sandpaper. Apple PC to the iPhone. Merck actually started out as a chemical company and ended up going into pharmaceuticals. Disney started with animated films, ended up in theme parks and merchandise.

And then maybe one that’s interesting a lot of people haven’t heard but Circuit City, which was sort of like a poster child for bankruptcy, shitty business eventually, they actually created CarMax before going bust, and they applied all the same things that they understood about Circuit City to selling cars, and that’s where CarMax evolved from.

So, this brings us into what I teased at the beginning this thing called Burgelman’s trap. And Robert Burgelman was a Stanford business school professor, and he observed that the greatest danger in business, in life, lies not in outright failure, but in achieving success without understanding why you were successful in the first place. So, if you’re kind of right for the wrong reasons, that’s like the worst-case scenario. And it’s quite likely that if you can’t explain the flywheel of a company that you believe is a superior business that you’re investing in, you might not understand it well enough to consider it within your certain confidence, and you’re therefore falling into Burgelman’s trap. So, a little section on flywheels that you can look for and hopefully helps deepen your understanding a little bit of why some businesses grow to be so dominant.

Tobias: That was brilliant. Thank you. Right, Jim, you’re back in the book.

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